S-Corp – Find Out What It Is!
If you are a business owner, there is an important choice that you need to make. You should know how to classify your business.
With a number of different business entities you can choose from, such as an LLP or LLC, Sole Proprietorships, and S-Corp, you should learn the difference between each one.
In this article, we will focus on S-Corporations. They are a good option for an individual to create a business.
The structure of S-Corporation allows shareholders to avoid steering clear of taxes. And probably save some money.
This type of corporation offers you protection such as limited liability.
Here you can find out what is an S-Corp and how this company type compares itself to other business structures.
First of All, What Is a Corporation?
A business entity that you create by signing incorporation documents to your state is the meaning of a corporation.
Corporations are different for each group in a lot of ways. What a corporation has are shareholders and directors.
To explain it easily, the shareholders in the company own stocks, and the directors are the ones that set plans and keep an eye on the business.
If you’re an owner of a smaller business, you can hire one person to do all of those roles.
Having that in mind, a corporation is a legal entity. As such, a business is specific to its shareholders, which means that they are not legally or personally responsible for debts that may happen in a corporation.
Having a corporation means that you will also be subject to a bunch of legal requirements. What this means is that you will have to hold regular meetings with your staff and also keep corporate records.
What Is an S-Corp – A Quick Course
So, now that you know what a corporation is, you should also know what an S corporation is.
It is a business structure and, also, a tax structure. An S Corporation is available to LLCs and partnerships.
With that being said, in an S-Corp, profits go through to the shareholders. After the profits “arrive”, they then pay taxes on the profits while they file their personal income taxes.
If you thought this through and you want to register your S-Corp, you should submit Form 2253, which has to be signed by all the shareholders.
What Are the Benefits?
It’s normal to ask yourself this, but you should know that there are a bunch of benefits to consider.
Firstly, your business will have to have a pass-through status. With this being said, you will only pay taxes on the money you earned in your company. Don’t worry about the taxes for your business itself.
Second of all, know that shareholders have limited liability. They are not personally accountable for any actions that may occur in the company.
The third benefit, and maybe the most important one, is S-Corporations taxation.
If your company suffers any profits or losses, you will have an S-Corp pass to stakeholders. What that means is that you will only pay taxes once. Your company will not be charged for any profits that the corporation may earn.
S Corps – How Are They Taxed?
You should know that S-Corps don’t have to pay any corporate taxes.
Instead, shareholders report it on their personal tax returns.
If you are seriously considering an S-Corp, you should also know that this particular business structure allows you to avoid double taxation.
It would be a good thing to avoid being taxed at the business, and also a personal level—which will not happen under an S-Corporation. This is probably the main reason people choose this type of business structure.
Are There Any Downsides to an S-Corporation?
Since not everything is perfect, there are also some downsides to consider.
You will have to deal with shareholder restrictions that may happen.
They must pay taxes on income that your S-Corporation gets, even if the shareholder didn’t get any of the funds.
Also, the IRS requires you to have a salary, even if the company has not made any profit. Yet.
A Few Requirements for S-Corp
According to the IRS, to qualify with this business structure, you must match these requirements:
- Own a domestic corporation
- Think about who are your shareholders – it should be someone you can trust.
- If you elect S Corporation as your business structure, you should also submit Form 2553, for your tax purposes.
Get Help From the Professionals
No matter how hard you search, there is not really the best option among the possible business structures. You should decide based on the specific situation of your business.
As an owner, it can help you to consult with tax professionals. No matter what, we can help you understand the basics of each option and help you choose the best one.